Social Security is crucial to American retirement. 1 in 5 Americans and 1 in 4 families depend on it. That’s 65M people who will collect $1 trillion in Social Security benefits in 2020.
I said, $1 trillion.
With this massive of an entitlement program, it serves you well to understand how it works in gory detail so you can maximize your benefits. Sound good?
(If you’re a youngster, don’t glaze your eyes over…you may think Social Security is not relevant to you anytime soon, but what you do now impacts how much you collect in the future. So listen up – your retired self will thank you….)
This week, I invited Jim Blair to come share the goods on how Social Security works. Jim is a Social Security expert who spent 35 years at the Social Security Administration advising on benefits and claims, so he knows a thing or two about it.
- How Social Security benefits are calculated
- Key factors to consider when deciding what age to claim
- Optimal claiming strategies and tradeoffs of claiming younger vs. older
- How spousal, divorced, and survivor benefits work (and how they impact your claiming strategy)
- When Social Security is subject to taxes (and how much)
- What is likely to happen to Social Security when its assets go to zero (in <20 years)
- Whether young people should count on Social Security being there in the future as they plan their retirement finances
Do you factor in future expected Social Security benefits into your retirement planning? Or do you just assume it won’t exist by the time you retire? Do you think it’s better to claim younger or older? Why? Let me know by leaving a comment when you’re done.
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Links mentioned in this episode:
- Premier Social Security Consulting
- jblair at mypremierplan.com
- How Social Security Works: The Ultimate Guide For Laypersons
- HYW private Facebook community
Read this episode as a post:
Andrew Chen 01:22
My guest today is Jim Blair. Jim is a Social Security expert who spent 35 years of his career with the Social Security Administration, where he served in a variety of roles, including as one of the district managers advising on benefits and claims.
Since retiring from the Administration, he is now a Social Security consultant and a certified instructor for the National Social Security Advisor Program, a certification program for consultants in the field that he co-created and developed.
Jim, thanks so much for joining us today to share insights and tips all about Social Security.
Jim Blair 01:56
I’m real happy to be here. I like to talk about Social Security. It’s what I know, so I’m just glad as can be.
Andrew Chen 02:04
Great. I understand you spent the majority of your career with the Social Security Administration, as I’ve mentioned a moment ago. What was your professional background there, and what did you do for the Administration?
Jim Blair 02:13
I did a number of jobs, started off as a service representative. When you’re able to walk in the Social Security Office, that’s the smiling face you see in the front door. But they help folks mainly who have already started receiving their Social Security benefits.
But I did take claims for retirement, survivors, disability, and health insurance. I did that for about 10 years, moved into the management end of it. I did a few jobs there, but I did spend the last nine years there as the district manager of the Piqua, Ohio office.
Nobody ever knows where Piqua, Ohio is. It’s about 30 miles north of Dayton.
But the main point with that being Social Security is a pretty accessible government agency. If you need to see someone at the Social Security Office, there’s an office fairly close to where you’re at.
Now, depending if you’re in Wyoming or a state like that, it may not be real close, but it’s still not too far. Whenever they become open to the public again, then if you need to go in, they’re there. So it’s a good agency to have to deal with.
Andrew Chen 03:20
Great. And it sounds like you co-created this National Social Security Advisor Program. Tell us a little bit about what that is and what that certification is about.
Jim Blair 03:31
The National Social Security Advisor Certificate Program is a program my partner Mark Kiner and I started, after a day of training where we teach financial advisors, CPAs, insurance agents about Social Security.
And we cover all sorts of topics: retirement, spousal benefits, survivor benefits, something called the annual earnings test. All sorts of topics of concern to people in the general public, we cover with them.
After the day of training, they can take an assessment, also known as a test. But they take the assessment, and if they pass, they become an NSSA certificate holder. Basically, that just tells the general public that that individual has more knowledge than the average advisor about Social Security.
Andrew Chen 04:23
I think most people will know some basics about Social Security, namely that during your working years, you pay into the system via Social Security taxes, and then in your retirement years, once you reach an eligible age, you can start collecting from the system.
But for the lay person who doesn’t know a lot more than that, to help them orient, can you describe at a high level how Social Security works as the overall process?
Jim Blair 04:52
A lot of people do know Social Security as a retirement program. They don’t necessarily know that it’s a program that will pay their spouses in some cases. If they have minor or disabled children, they can receive benefits.
Or if there’s a survivor case where someone passes away and they leave behind minor children or disabled children or what Social Security calls an aged spouse (that’s age 60 or older), there are benefits that are payable.
What folks need to take into consideration when they get ready to apply, of course, retirement is the biggest one. About 70% of the benefits that Social Security pays out goes to retirement. So it is our big program.
What you need to remember, just because you’re age 62 and you can file for benefits doesn’t necessarily mean you should. If you file at 62, you’re going to see a reduction in those benefits.
Depending on your full retirement agent, that’s right now a moving target. It’s somewhere between ages 66 and 67. But the reduction at 62 can be somewhere between 25% and 30%.
That is a permanent reduction. A lot of folks think, “Well, I’ll take my benefit at 62. I’m sure it’s going to be reduced, but when I reach my full retirement age, it will be increased.”
That’s not the way that it works. You take that reduction. You see that reduction for the rest of your life because Social Security is a lifetime benefit.
But in many cases, it’s a joint lifetime benefit. If your spouse is going to step into your shoes when you pass away, then you taking a benefit at age 62 not only reduces your benefit. It reduces the survivor benefit.
That was one of the hardest things that I had to deal with when I was taking claims from people. You would see a couple. They were just fine when each of them were alive and receiving their Social Security, but one would pass away and you would be taking care of getting those survivor benefits set up.
You would tell them how much their benefit is going to be, and they would tell you, “That’s not enough. I need more money than that.”
And that’s not the time to be looking at that because then it’s too late. It’s based off of what you do when you pass away and your survivors take over.
You take it at 62. You’ll see that reduction.
On the other hand, I think most people know if you wait until age 70, you see some kind of increase. That increase also follows to the survivor.
So planning ahead, I think, is the most important thing people can do. You need to take into consideration what’s going to follow with your estate planning and that type of thing. But it is a lifetime benefit.
I think the thing that people don’t know, and of course, nobody knows how long we’re going to live. If we know that, it will be real easy to say, “I should pick my benefits at this age.” But it’s something you need to at least factor in.
According to the Social Security Administration, a male in his 60s has a life expectancy on average of about age 84, and a female somewhere around age 87. They also tell us that half of the folks that age will live beyond those ages, and a quarter of those folks will live to be 95 or older.
Now, they don’t tell us which one of us those are, so we have to figure that out on our own. But you look at your health and your family history.
I tell people all the time, I’d rather plan for my money to last until I’m 90 or 95 even if I pass away at age 75 than to think, “Well, I’m going to pass away at 75,” plan my money in retirement around that, and now I’m in my 80s. What do I do?
So it’s important that people plan ahead and maximize their Social Security benefit.
Andrew Chen 08:55
Great. There’s a lot of interesting insights there. I would love to unpack some of that.
As you mentioned, a lot of the complexity in understanding how to maximize your benefits is in determining when to start collecting payments after you become eligible because there’s this range of years where you can choose to enroll, and the age you decide to enroll determines your benefit amount for life. And you can’t change that decision once it’s made.
And there are these tradeoffs around the size of the benefit, how it might affect your spouse or survivors, and also you have to estimate your own mortality.
For someone who is thinking about when to claim and claiming strategies, can you provide a framework or pointers for how they should think about the optimal claiming strategy? You’ve alluded to some of the factors that they should consider, but what are the full range of key factors that folks should consider when thinking about when to claim?
Jim Blair 09:53
The first thing that folks should do is go to the Social Security website, ssa.gov.
On that website, they have what they call an account. It’s called My Social Security. You need to sign up for that.
Once you do that, you can look at your Social Security benefit statement whenever you want. They used to mail them out every year many years ago. I think it was 2012 they stopped doing that.
Supposedly, they mail them to you each year when you’re in your 60s. I talk to people all the time in their 60s who say, “I haven’t seen a statement in years.”
So create the account on ssa.gov. Then you can look at your statement because this will give you an estimate of your benefits at age 62, at your full retirement age, and even age 70.
Now, they do make an assumption and they assume on this statement that you’re going to continue to work and earn whatever it was you earned last year. The closer you get to age 62, the more accurate it is. But it’s a great planning tool for you to look at.
Both you and, if you’re married, your spouse should create this account and look at your Social Security benefit statements at least once a year. And they will remind you once a year to look at the statement so you’ve got an idea of what your benefits are going to be.
This is a great base. You’re looking for “What kind of income do I need in retirement?” and then “Where does that money come from?”
We know once you start your Social Security, you’re going to receive that the rest of your life. Do I start it early or take a reduction? Do I wait until full retirement age?
One thing to take into consideration, what’s your breakeven point? If we just look at the dollar amount of taking the reduced benefit versus the higher benefit at full retirement age, it’s about a 12-year breakeven point.
If your full retirement age is 66, you’re looking at about age 78. You’ll receive the same amount of money from Social Security. If your full retirement age is 67, that’s about age 79. As I mentioned, average life expectancies either for you or your spouse exceed those dates.
Now, waiting until 70, that’s a little trickier. Obviously, that gets you the most amount of money that you can get, but that doesn’t necessarily maximize your benefit for your particular situation.
We call it situational Social Security because everybody is different. How old are you versus how old is your spouse? What is your work history versus your spouse’s work history?
Are you going to receive retirement? Is your spouse going to receive retirement or maybe a spousal benefit from you? Or it can be a combination of the two.
Is it going to be there’s a big difference in your age, or are you close in age? There’s a lot of software packages out there that will allow you to put in your information and it will give you the different scenarios that you have.
But when I talk to people, we look at those things. What’s your age? What’s your spouse’s age?
If you’re lucky enough to be born by January 1st of 1954 or earlier, that makes you a little older but it gives you an opportunity to file for what we call a restricted application. You could wait until age 70 to take your own, but in the meantime, draw off of your spouse. So we would want to take that into consideration.
How many children are there eligible? Sometimes people file earlier than they were going to because they have a child who could also draw. It could be a minor child or a disabled child.
So we’re looking at all those different factors when we’re trying to help people decide “When do you maximize your benefit?”
Andrew Chen 13:48
I would love to jump into this a little bit more. First, I would love to just clarify for folks who are listening. You mentioned this concept of a breakeven point.
I think I know what you mean by that, but could you help explain that in a little bit more detail for how folks should be evaluating that? What exactly do you mean by breakeven point?
Jim Blair 14:05
What you’re looking at is the amount of money you’ve received from Social Security. If you take your benefit at 62, then you’re seeing a reduction somewhere between 25% and 30%. But you’re also getting benefits somewhere between four and five years earlier, depending on your full retirement age.
To draw that benefit earlier, you take less money. But by age 78, the total amount of money you receive from Social Security is going to equal out, so that money that you gained by filing four years earlier, you catch up at about age 78 to 79. And then if you took your benefit at age 62, you’re getting less money than you would have had you waited.
So we look at the overall amount.
Andrew Chen 14:53
So really what this is about is maximizing the number of Social Security benefit dollars that you get over your lifetime.
The earlier you claim, you get lower payments but you collect them for longer. The later you claim, you get higher payments but you collect them for shorter.
So the breakeven point is the point where claiming early versus claiming late or claiming at full retirement age, those things equal out where you’re indifferent between the two because it’s the same amount of money. Is that correct?
Jim Blair 15:24
Andrew Chen 15:27
Gotcha. Claiming the moment you’re eligible versus waiting all the way to 70, can you help us understand, what is the type of profile of a claimant who would be best suited to claim immediately once they’re eligible at 62?
And what are the markers of the profile of a person for whom it makes total sense to wait even all the way until age 70? So folks can get a sense of the ends of the spectrum.
Jim Blair 15:57
The difference between, first of all, at 62 and 70, it’s a 75% difference in your monthly benefit amount. So if you wait until age 70, you’re receiving 75% more each month in monthly benefits.
Of course, that’s the good news. What’s the bad news? You’re waiting eight years to collect it, so that’s a tradeoff.
Who should file at 62? There’s what we call the annual earnings test that applies to people who are under their full retirement age who want to take their Social Security benefit but also want to work. If you have wages, you work for someone and you get paid a wage, or if you’re self-employed it would be your net self-employment.
If you have that type of earned income between 62 and your full retirement age, if you go over a certain amount, Social Security is going to start withholding some of your benefits. If you’re still working, maybe filing at 62 doesn’t make sense because you’re not going to receive that benefit.
This year, the amount you can earn before it affects your Social Security is $18,240. If you go over that, they hold back one dollar of benefits for every two dollars that you go over. Once you reach full retirement age, that goes away.
The amount of earnings you can have from earned income doesn’t matter. You can draw your Social Security benefit. So what is your work plans between 62 and full retirement age?
Now, waiting until age 70, most of the people that I see that wait until age 70 wait because they’re still working. And they know that they can get an 8% a year. It’s guaranteed.
Eight percent a year increase by waiting past full retirement age, no later than 70 because you stop earning that at age 70. But that’s guaranteed. You can’t get an 8% guaranteed anywhere.
But it’s not compounded. You wouldn’t have to earn 8% out on the open market to amass that. But it is guaranteed, so that’s the good part.
But you do need income. So if you’re retired at full retirement age, a lot of people go ahead and take their Social Security.
The other part is you don’t have to wait until you’re 70. It’s not either/or.
A lot of folks will delay past their full retirement age and earn some delayed retirement credits. But most people don’t wait until age 70.
It just depends too on what your income needs are. What will your income needs be once you’ve stopped work altogether?
I think on average, folks have about 40% of their income on retirement comes from Social Security. The more you can make that percentage, or the higher you can make that percentage, the less stress it puts on your other sources of income.
Depending on how you save or how well you do on your investments, you could run out of money. Technically, you can. Hopefully you don’t, but technically you can.
You can’t run out of Social Security benefits. Regardless of what you hear on TV, it is a lifetime benefit.
Andrew Chen 19:12
So it sounds like whether you work or not influences the decision of whether to claim earlier versus later. What your personal financial situation looks like will influence whether you claim earlier or later, namely how much you need the money, earlier versus later.
What other factors should folks consider when deciding whether to claim on the early end or late end in terms of their spousal situation or family situation, their health situation? What are the markers that would suggest someone would benefit more by claiming earlier or later in those scenarios?
Jim Blair 19:46
Family does factor in. It depends on your spouse’s work history.
If your spouse never worked under Social Security-covered employment and they’re going to draw off of your work record, they can’t draw until you apply. If you wait until age 70, they wait until you’re age 70 to draw their benefit.
A lot of times, particularly if you’re close in age, that doesn’t make a lot of sense. Delaying from full retirement age to age 70 is about a 12 and a half-year breakeven point. But if you factor in a spouse, you’re looking at a 17- or an 18-year breakeven point, so it doesn’t make a whole lot of sense.
Are there children now as well on your work record? If you don’t apply, then they also have to wait. So they’re going to have to wait until you file to take their benefit as well.
That may mean that filing earlier, you’re getting less money for yourself, but it still brings more money into the household.
One other factor, particularly if somebody is still working, would be income taxes. Social Security benefits are subject to federal income tax. There are about nine states where it’s subject to state tax.
But you want to consider, if you’re still working, say you’re working full time, your full retirement age. If you take your Social Security, whatever tax bracket you’re in, some of your Social Security is going to be subject to that tax.
Andrew Chen 21:14
And health considerations that folks have, how should folks think about that in terms of timing their claims?
Jim Blair 21:23
That’s a tricky one because a lot of people think, “Well, my health is terrible. If I had known I was going to live this long, I’d have taken better care of myself.”
“But I didn’t, so my health is awful. I’m taking my Social Security right away so I can get something before I pass away.”
That’s fine. That is definitely a consideration. But also consider any survivor benefit.
If your spouse is going to step into your shoes, it’s not just how long you’re going to receive your benefit. How long will your spouse receive theirs?
If they’re in pretty good health or their family history says everybody in their family lives into their 90s, if you take your benefit earlier and your spouse then steps into your shoes, they’re going to take a lesser amount because of that. So it’s not only your health, but also your spouse’s health.
Now, single people, obviously they would take their benefit, particularly if they’re in poor health. Go ahead and take it because you don’t have that issue of someone stepping into your shoes. So that’s another factor as well.
Andrew Chen 22:32
I want to step back for a moment and just give a little bit of insight, because we’ve been talking about how to claim. I would love to get some insight into how benefits are even calculated in the first place.
What is the formula for how Social Security benefits are calculated?
Jim Blair 22:50
That’s a tough one. Everybody better get a cup of coffee and get a lot of caffeine in them. This one is a little dry.
But I’ll do the basic one. They’re going to use your highest 35 years of earnings.
Now, first of all, to become eligible, you have to earn what Social Security calls credits. They used to call those quarters of coverage.
They call them credits now. They’re exactly the same.
But based on your earnings, you can earn up to four credits per year. Everybody needs 40 to be eligible for a retirement benefit. That’s 10 years of your time worked.
Once you have those 40 credits, you’re eligible for some type of retirement benefit. But when they compute that benefit, they’re going to use your highest 35 years of earnings.
Now, what they do to those earnings, for all the wages you have from that very first job at Wendy’s or McDonald’s that you had when you were a youngster through age 59, they’ll apply an inflation factor to those years, bring them up to today’s dollars. And that inflation factor is based on the year that you turn age 62.
Once they apply that inflation factor, they pick the high 35 years, they divide that by 420 (that’s the number of months in 35 years), and that gives Social Security what they call your average monthly wage after it’s been adjusted for inflation.
And they’ll take that wage and break it into three brackets. They call them bend points.
The way it’s weighted is to give lower earners a better percentage return of Social Security benefits versus the higher earners. They don’t give more money. They just get a better return on what they’ve paid.
So they’ll take that average wage and come up with a figure. They call it a primary insurance amount.
You may see this when you look at different documents and articles about Social Security. It’s called a PIA. Basically, that’s your benefit at your full retirement age and that’s what they base everything off of.
So keep in mind, whether you have 35 years of earnings or not, that’s what they’re going to use. If you have 25 years of earnings, you’ve got 10 years of zero earnings in there.
Andrew Chen 25:06
That’s helpful context.
Basically, you need to work 10 years minimum to get anything. And after you work 35 years, then at least you’re getting credit for every year. And then if you work more than that, it sounds like they’re just picking the highest 35 wage earning years for purposes of calculating the primary insurance amount.
Jim Blair 25:31
Andrew Chen 25:32
Okay. We touched on this a little bit earlier. We talked a little bit about spousal and child benefits and survivor benefits.
I think in common knowledge, people think about Social Security as a personal retirement benefit, and maybe the spousal and child and survivor benefits are less well-known. Can you describe a little bit about how those benefits work and how they impact claiming strategies?
Jim Blair 26:01
Sure. The spousal benefit we’ll talk about first.
You have to be at least age 62 or older. You have to be married to your spouse for 12 months or longer. A lot of people confuse that with the divorced spouse where you had to have been married 10 years or more.
But if you’re currently married, it’s 12 months. You’re age 62. And the key is your spouse has to have applied for benefits, either retirement or disability.
They don’t have to be 62. They could be age 58 drawing a disability benefit. But if you’re age 62, you could draw a spousal benefit.
It’s going to be based off of half of their benefit at their full retirement age. If you’re eligible for a Social Security benefit on your own work record, you have to take that first. Then if you’re eligible for an additional amount from a spousal benefit, they will pay you that amount.
I’ll just give you a quick example. The higher earner has a full retirement age benefit of $2000.
If the spouse never worked, at their full retirement age, they’d be eligible for $1000 or half. Even if that person took their benefit at 62 and the worker was receiving $1500 a month, at their full retirement age, their spouse could receive half of the $2000.
But if they had worked themselves and they were eligible for $750 a month on their own at their full retirement age, they would take from their own and get $750, they’d get another $250 from their spouse to bring them up to that $1000.
If your own benefit is $1200, you wouldn’t receive any spousal benefit. So it’s all going to be based on your work history.
Of course, just like retirement, if you take a spousal benefit before your full retirement age, it also is reduced for age.
Now, children are eligible. Minor children under the age of 18, as long as they’re not married. If they’re between 18 and 19 and still a fulltime student in high school (not college anymore, but high school), they can draw until either they graduate or reach age 19.
What I see more often than the minor children, if you have a child that was disabled before the age of 22, when the parent applies for benefits, that child is eligible for a benefit. And just like the spouses, it’s based on half of the worker’s full retirement age benefit, and then they could draw that benefit the rest of their life.
Good thing for the children or anybody on disability really, once you’ve been drawing these benefits for two years and where you’re eligible for Medicare, you don’t have to wait until age 65.
You might have someone who is age 66 filing for Social Security benefits and they have a child who is age 40 who has been disabled since birth. That child can now draw off of the parent’s work record, and two years later, they’ll be eligible for Medicare.
Andrew Chen 29:03
Is there a disability test? How does the Administration evaluate whether you’re disabled or not? What is the definition?
Jim Blair 29:13
Social Security has a term called substantial gainful activity. They abbreviate that SGA. What that means is if you can’t work and earn, this year it’s $1260 a month or more, then you can meet the definition of not meeting SGA and be eligible for a benefit.
Now, one thing that they do look at is not just based off of a job you were doing, but based on your age, your education, and your work experience, are there other jobs you could do? If they determine that there are no jobs you could do and earn $1260 a month or more, then you could be found to be disabled and draw Social Security disability.
If you don’t have enough work and your income is limited, they also have what they call supplemental security income, SSI. The disability requirements are the same for both. It just doesn’t have a work requirement to it.
Andrew Chen 30:11
Is there a medical definition? How do they know it’s not just because you don’t want to work or you don’t have good work skills or whatever the case may be? Is there a medical doctor that has to sign off on it?
Jim Blair 30:30
Well, it is based on medical. It could either be physical or mental impairments. So it is based on those types of impairments.
It’s not just because you don’t want to work or, for whatever reason, you don’t do a good job. It’s based on physical or mental impairments. There’s all kinds of impairments out there, but they’re also going to base it on your age, education, and work experience.
You can’t say there’s a specific condition that someone would automatically draw with disability. They’re going to look at their overall situation. It is reviewed.
Now, when someone files for disability, they do that with the local Social Security Office. They don’t make the decision. Each state works with the Social Security Administration.
For instance, in Ohio, you file for disability at the Social Security Office, but the State of Ohio makes the decision. Or if you’re in California, the State of California.
And they have doctors that review it, but they’re not all doctors. They’ll contact your medical sources, your doctors, your hospitals, your clinics, and get your medical information, make the decision, then it’s reviewed by a doctor.
If you’re found to be disabled, you receive benefits. If not, you receive that letter that says your claim is denied, and of course, then you are off to the races with your appeals.
Andrew Chen 31:59
Got it. Cool. When it comes to spousal benefits you were describing a moment ago, I just want to clarify a couple of things.
It sounds like the person who is claiming off of their spouse’s work record, they’ll have to file for their own Social Security first, and then it sounds like they’ll get the higher of the benefit for their own work record or the 50% of their spouse’s record. Have I got that right?
Jim Blair 32:33
Right. And a common misconception is “I’ll take my own at 62 and then I’ll get half of my spouse’s when I’m full retirement age.” It doesn’t work that way.
When you file on your own, first of all, if you’re eligible on your spouse, you’d have to go ahead and take it. Social Security has a term called deemed filing. What that means is when you file an application for benefits, you’re filing for all the benefits you’re eligible for.
It doesn’t apply to survivor benefits, but it certainly does to spousal benefits.
Andrew Chen 33:03
Did you say earlier that the person who is getting half of their spouse’s benefit has to be full retirement age, or the person who is filing based on their own record has to be full retirement age? I didn’t quite catch that part.
Jim Blair 33:22
No. To get the full amount, you have to be full retirement age.
The non-worker would get 50% of their spouse’s benefit at the non-worker’s full retirement age. But if they file at 62, it’s reduced to about 30%.
Andrew Chen 33:42
I see. It sounds like the implication then is, let’s say the worker files at 62, the second they become eligible and the spouse also does the same, you’re taking a double hit then, right?
Jim Blair 34:02
Andrew Chen 34:02
Because the worker is getting a 25% reduction and the non-worker spouse is getting a 20% reduction off of already a lower amount.
Jim Blair 34:14
Right. That couple you talked about, if they waited until their full retirement age, let’s just say he’d get $2000, she’d get $1000, if they both file right at age 62, he gets $1500, she would get $700. So they would each see a reduction for age.
Andrew Chen 34:31
That’s really important to know in terms of deciding when to claim.
And it sounds like the spousal benefit does not require the working spouse in this example to be deceased. They can actually be both claiming simultaneously and alive and well. Correct?
Jim Blair 34:52
Absolutely. Right. This can be a life case.
The worker is still alive. They apply for benefits. Their spouse may be eligible on their work record.
Andrew Chen 35:03
Let’s say the working spouse waits until full retirement age or even waits past age 70 so they get a full or more than full benefit, and the non-working spouse also waits until full retirement age so they get their full 50%. What happens when the working spouse passes away?
Jim Blair 35:25
When the working spouse passes away, the benefit that they were receiving is now received by the surviving spouse.
Andrew Chen 35:34
So it converts into the higher of the two.
Jim Blair 35:39
And one of the big differences with spousal benefits, if the worker takes benefits earlier or even waits until age 70, that doesn’t affect the calculation of the spousal benefit, but it will affect the calculation of the survivor benefit.
Andrew Chen 35:58
Can you say more about that?
Jim Blair 35:59
Yeah. We have our couple you were talking about.
He files at age 62. He gets $1500. If his non-working spouse is older than he is and they’re full retirement age, they’d get $1000, half of the $2000.
So the fact that he took a reduction didn’t carry over to the spouse. When he passes away, though, now her benefit is his benefit. She just gets the $1500.
If he had waited until age 70, her benefit is still $1000. His benefit is increased, say, 32% to $2640. When she survives him, she’d get the $2640.
Andrew Chen 36:43
I see. It sounds like the implication then is that when the working spouse passes away, the survivor anyway is going to be able to step into the shoes of the deceased and claim that benefit, assuming it’s higher.
Jim Blair 37:01
Right. They’ll receive 100% of what the deceased was receiving, or if they weren’t receiving it, what they would have been eligible to receive.
Andrew Chen 37:11
I see. What they would have been eligible to receive at the time of death?
Jim Blair 37:15
Right. If someone is age 66, “I’m going to wait until 70 to take my benefit,” and they pass away at age 68, never received a Social Security benefit, those delayed retirement credits they earned for those two years would apply to the surviving spouse.
Andrew Chen 37:36
I see. Sounds like your phone is ringing.
Jim Blair 37:40
Yeah. I apologize for that.
Andrew Chen 37:42
No worries. So basically, it does not require the deceased to have actually filed a claim.
It just matters how old they were when they were deceased. Is that correct?
Jim Blair 37:54
Right. What could they have received when they passed away? Even if they’ll pass away before age 62, someone dies at age 50, their surviving spouse at age 60 or older can still draw benefits off of their work record.
Andrew Chen 38:12
So that covers spousal and survivor benefits. We talked also about disability benefits, how these impact claiming strategies.
One of the things that I think comes as a surprise to many people (I was certainly surprised when I learned about this) is that there’s also a divorce benefit, which you touched on very briefly earlier. Why does this exist, and how does it work?
Jim Blair 38:39
Well, I’m not sure why it exists. Maybe because one of our congressmen had a divorced wife bugging him for money or something. But I guess they felt that if you spend enough time with an individual, you should be eligible for benefits based off of their work record.
To be eligible as a divorced spouse, there’s actually two categories of divorced spouses. First thing Social Security is going to look at, you have to be age 62.
You had to be married to your ex-spouse for 10 years or more. Your ex-spouse has to be receiving a Social Security benefit.
And of course, you have to be single. You can’t be married and draw off of your ex-spouse.
If you meet those requirements, then you can draw the benefits. And they’re computed just like a spousal benefit.
If your ex is not going to apply for Social Security benefits anytime soon for a various number of reasons, there’s a second category. You still have to be age 62 or older, but so does your ex.
So if you’re both 62 or older, you were married to them for 10 years or more, you’ve been divorced for two years or longer, and you’re single, you can draw off of their record even if they don’t apply.
So if you and your ex-spouse are both age 62, your ex-spouse is still working, not filing for Social Security benefits, technically, as long as you’ve been divorced for more than two years, you’re eligible off of their work record.
Andrew Chen 40:20
Does it require cooperation between the parties? Because what if the parties are not on speaking terms?
Does it require approval by one for the other, or can the divorced spouse just apply unilaterally on their own? And how would they know about the claiming status of their ex-spouse?
Jim Blair 40:45
You won’t know. If your ex-spouse applies on your work record, you don’t know unless they tell you.
Social Security is not going to tell you. They don’t have to get permission from the ex. They don’t have to contact them.
The only time that they might contact the ex-spouse is if you can’t come up with their Social Security number and Social Security can’t either, and they would ask, “Do you care if we call and get your ex’s Social Security number?”
Because you’re right. Generally if you’re divorced, that means nine times out of 10, it didn’t end on a good relationship.
There are a lot of people that have good relations with their exes, but there’s a lot of divorce cases because of domestic abuse. And in those cases, the people will tell you, “I want nothing to do with my ex-spouse, because if they find out I’m going on their work record, there’s all kinds of problems.”
They will never know. Technically, you can walk into a Social Security Office and say, “Give me a copy of my Social Security record.” And you’re entitled to receive that.
If your ex is drawing off of your record, that won’t be missing. You will not see that, so there’s no way that you know.
The way Social Security finds this information out, when you apply for benefits, they’re going to ask you, “Are you currently married?”
After you give them that information, they’ll ask, “Did you have any prior marriages? And if so, did they last 10 years or more, or did they end in your former spouse’s death?”
They ask those questions because maybe you’re eligible on your ex’s record or maybe they’re eligible off yours.
Andrew Chen 42:21
I may have missed this a moment ago, but you mentioned the two buckets of divorced cases.
The latter being one where you’re applying for divorce benefits based on your ex-spouse’s record but they haven’t claimed yet. You’re both 62. They’re still working.
The first bucket, the part I didn’t quite catch was: if you are applying for divorce benefits, does your ex-spouse need to have filed for a claim? Must they have filed for their own benefits, or is that not necessary?
Jim Blair 43:03
No, they would have had to have applied. So they’re either receiving retirement or disability.
Andrew Chen 43:09
So then, in that case, if I want to apply for divorce benefits based on my spouse’s work record and I’m not on speaking terms, would I just walk into a Social Security Office and apply?
And let’s say my spouse hasn’t yet filed for their own benefits. Then my application would just be waiting until my ex-spouse actually submits their application, or would I have to just keep going back periodically to test when my ex-spouse had filed?
Does that make sense? If they’re not on speaking terms, how would the one spouse who was applying know about the filing status of the other spouse? Or do they not need to know that?
Jim Blair 44:01
Social Security will look that up when you apply. You file for benefits. You say, “Yes, I have an ex-spouse,” and give them enough information.
And they don’t need much to come up with their Social Security number if you don’t know it. They’ll look to see if they’ve applied.
Andrew Chen 44:15
So if they look to see and they see, “Nope, they haven’t applied yet. Sorry, we can’t help you,” do they just say “Come back some other time”?
Or do they say “We’ll take your application and put it in a pending status so that once your spouse applies, then we’ll automatically begin your benefit”?
Jim Blair 44:31
Well, you’ll need to know to contact Social Security. But what they should tell that individual, “I see your ex-spouse hasn’t applied for benefits.”
“You’ve only been divorced six months, so you’re not eligible yet, but you will be in another year and a half. So contact us in a year and a half and you can get an additional benefit from your ex-spouse’s work record.”
Andrew Chen 45:00
You’re saying that then they moved to the second category.
Jim Blair 45:03
Andrew Chen 45:04
Jim Blair 45:05
That’s called the independently entitled divorced spouse. Once you’ve been divorced two years or longer, if both you and your ex are 62 or older, you’ve moved into that category.
Andrew Chen 45:18
What if one of you is not 62 but you have been divorced for more than two years?
Jim Blair 45:24
They have to wait until they reach age 62.
Andrew Chen 45:27
So then my question is do you just have to keep trying every year, or does Social Security take your application the very first time and then just put it on hold until the moment they see your spouse claim and then yours will automatically trigger as well? Does that make sense?
Jim Blair 45:46
Yeah. You’re going to have to contact Social Security. They’re not going to contact you.
If somebody applies, if your ex walked in and applied, and now you’re eligible on your work record, in that case, they would contact you. But if the spouse reaches 62, they’re still working, they’re not going to file for benefits, then it’s up to you to know to apply for those benefits.
Andrew Chen 46:08
You mentioned a moment ago, there are situations where benefits are taxed. Can you talk a bit about what are the situations where Social Security benefits are taxed and how much are they taxed?
Jim Blair 46:22
Sure. It’s based off of whatever your tax rate is. But basically, what they’ll look at is your AGI without the Social Security benefit added in.
It’s all of your income and then half of your Social Security benefit. Social Security calls this provisional income.
If as a single person, this exceeds $25,000, or a married couple, it exceeds $32,000, then half of your Social Security benefit is subject to federal income tax. So they’ll take half of your benefit, add that in as ordinary income, and whatever tax bracket you’re in, that’s how much tax you pay it on.
If your income as a single person is over $34,000 or your provisional income as a married couple is $44,000 or more, then 85% of your Social Security is subject to tax. Or as the Social Security Administration says, only 85% is subject to tax.
So you’ll have a bit of a break. Not 100% of it is counted, but 85% is subject to tax. And it’s all based on your tax bracket as to how much tax you pay.
What I generally will tell people to do, if you use a CPA, get them to do it. If you do your own taxes, then just run a little scenario through your tax software, and the software will figure all this out for you. You just put your income and what your Social Security is anticipated to be, and it will tell you right away how much of a tax liability you have on that.
They don’t automatically withhold from your Social Security for taxes. The only thing they automatically withhold for would be a Medicare premium. But you can ask them to do that.
And they do have voluntary withholding for taxes. You just have to figure out how much you want them to withhold.
Andrew Chen 48:19
It sounded like earlier you said that nine states will also additionally tax.
So if your benefits are subject to tax and you live in one of those nine states, then you’re paying both federal and state income tax. Is that correct?
Jim Blair 48:33
And shame on those states. I’ll just say that.
Andrew Chen 48:41
As we talked a little bit about earlier, not everyone will retire at 62 or 65 or even 70. How does continuing to work impact your Social Security benefits?
Jim Blair 48:52
It’s going to potentially increase the amount you’re going to receive. If what you earn this year exceeds the lowest year of those 35 years of earnings used to compute your benefit, they’ll drop the low year and add in the high year.
Particularly for high earners, it doesn’t make that much of a difference. I did an example for an individual who had maximum earnings her whole working career. What that means is they earned enough money that they stop paying Social Security tax.
This year, that amount is $137,700. If you’re on $200,000, you pay the Social Security tax on $137,700.
So we figured out for someone turning full retirement age who has had the maximum earnings every year, what would their income be versus if they worked another four years to increase their benefit? With the inflation, it wasn’t much of a change.
We saw about $21 a month increase. You’re paying Social Security tax on $137,700 for four years and getting an extra $21 a month. So one year doesn’t make that much of a difference.
However, if you’re working and drawing your Social Security benefits, it can increase your monthly benefit amount, particularly if you’re one of those folks who didn’t have the 35 years because you’re replacing a zero year.
So just because you take your Social Security benefit doesn’t mean if I continue to work, I’m locked into that number. It would never go down, but it could go up.
Andrew Chen 50:38
But if you delayed beyond full retirement age, you still get that 8% per year accelerator, like a reward for waiting, right?
Jim Blair 50:49
Right. And they’re two separate things.
If you’re working, you can still get credit for your earnings. And then on top of that, you get the 8%.
Andrew Chen 50:57
After the Social Security base fund runs out in less than 20 years now, what is likely to happen politically to Social Security?
This is not a political question, but I’m just curious. You’ve been with the Administration for a long time. What are the likely scenarios?
Jim Blair 51:16
Believe it or not, there are proposals out there in Congress. They just have to take action on it, and the president has to sign it.
I think one of the things that’s going to happen that’s almost in every proposal, so I suspect this is really going to happen, is they’re going to raise the full retirement age.
Currently, if you were born in 1960 or later, your full retirement age is 67. They’re going to raise that to age 70.
Now, it’s not going to be overnight. It’s more effective for people in their 20s and 30s. It may affect people in their 40s.
It’s taken 22 years to move it from 65 to 67. It will be something similar. But they’re going to raise that full retirement age to 70.
I think another thing they’re going to do is raise the amount that you pay Social Security tax on. I just previously mentioned the cap this year is $137,700. To make Social Security solvent, or at least almost solvent, they would need to raise that to about $240,000-250,000.
Now, if they do that, that’s a double-edged sword because that means your higher earners are going to receive a higher monthly benefit amount, which is going to eat into the money in the program. So they’re probably, along with that, going to do a little bit of means testing and just put a cap on that average wage we talked about earlier.
So the lower earners will still get the same amount of money that they’re entitled to. The higher earners will just have income that they paid Social Security tax on that they’re not getting any benefit from.
I think those things are probably a sure bet. It needs to be done by 2035.
But let’s say nothing is done. That scares a lot of people. What’s going to happen?
If you watch TV or listen to the radio or you go on the internet, you know Social Security is broke. Well, that’s not true.
Social Security right now has almost $2.9 trillion in assets. It’s in the form of U.S. treasury bonds, but it is available to them.
And every year so far, there’s always been a surplus. And by the law, that’s what they have to do with the surplus is buy those treasury bonds.
I suspect in 2020, maybe 2021, for sure. But we’re going to start seeing a deficit. That means less money is coming in from the taxes, from the income tax, from interest on those treasury bonds to pay all their obligations.
If they’re going to start cashing those in, then they’ll be gone by 2035. If nothing is done, by law, the Social Security Administration cannot operate in the red.
What that means is they’ll have enough money coming in to cover about 79% of their obligation. That means if you’re getting Social Security, you’re going to see a 21% pay cut. I haven’t found anybody yet that wants a 21% pay cut.
Will it be fixed? And not to be political either, I think it will be fixed.
We had the same issue back in the late ‘70s, early ‘80s. They were able to get it done. I know that the political climate is a lot different now, but politicians still want to get reelected.
Are you going to vote for somebody who cuts your Social Security income by 21%? I know I’m not. So I think eventually they’ll get it done.
Andrew Chen 54:46
So it sounds like the absolute worst case Armageddon type of scenario is benefits are cut by 21%, but in no event does it go to zero.
Jim Blair 54:58
Andrew Chen 54:59
I guess that leaves then my last question here, which is: when it comes to retirement finances, do you think younger people can rely on Social Security enough that they can safely factor it into their retirement planning?
It sounds like they don’t have to assume that it’s zero when they plan their retirement nest egg. Is that correct?
Jim Blair 55:19
Yeah. I believe that to younger folks, it will be there for them. We had the same conversation back when I was a younger folk and back in the ‘70s.
“Social Security has gone bankrupt. It’s not going to be there. It’s not going to pay anybody.”
It’s still there. It’s still operating.
They will make the changes. You can factor it in.
Now, one thing that if you don’t factor it in and you go ahead and plan for your retirement, that’s great because then Social Security will be icing on the cake. But I think you can still factor it in there. I know most young folks don’t think it will be.
The important thing is then that they plan for their retirement. They need to anyway. Defined benefit plans are pretty much a thing of the past.
So you have to plan for your own retirement income now. But I think it will be there.
Andrew Chen 56:11
Jim, this has been really insightful and helpful. I really appreciated the time to chat with you.
Where can listeners find out more about you and your work and services?
Jim Blair 56:21
The name of our company is Premier Social Security Consulting. We have a website. It is mypremierplan.com, if you want to look at that.
They can also email me if they want to. It’s [email protected]. Happy to answer any questions.
Andrew Chen 56:42
And you do consulting for individuals on claiming strategies? What is the nature of the consulting that you do?
Jim Blair 56:48
Yes, we meet with individuals or couples. Thanks to the current environment, it’s all done by phone.
But it’s easy not to do that. We’ve always done that. I’m in Cincinnati, though we’ve done it for people all across the United States.
We would need to get their Social Security benefit statement and we can put together their strategies, email it to them, and then through a phone call, discuss that.
One thing that we do, once you take our service, you can always come back to us and ask questions and we’ll look at it. There’s never any additional fees or anything. It’s a one-time fee.
Andrew Chen 57:29
Okay, great. We’ll link to your consulting firm’s website in the show notes for this episode. Hopefully that will be helpful to folks.
And for folks who are interested, I also wrote an in-depth blog post on Social Security and covered many of the same topics and the strategies that we talked about today. You can get that at hackyourwealth.com/social-security. We’ll link to both in the show notes.
Jim, thanks so much again for taking the time to chat with me today, and stay safe during all this pandemic craziness out there.
Jim Blair 58:00
Thanks. You too. I appreciate you having me on.
Andrew Chen 58:03
Cheers. Take care.
Jim Blair 58:04
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